Also referred to as a payment dispute, a chargeback occurs when a consumer questions a credit or debit card transaction and asks their card-issuing bank to reverse it. When this happens, the bank freezes the funds involved in the transaction and investigates to verify the credibility of the claim. If the merchant can’t prove that the transaction was legitimate, the bank will take that amount from the merchant and charge an additional chargeback fee.
When a chargeback occurs, the merchant has the ability to dispute it, but this process can take anywhere from a few weeks to several months to resolve. Disputing chargebacks often requires a lot of a merchant’s time and resources, and if your business is hit with many chargebacks, your account can be cancelled and flagged as fraudulent.
What are some of the common reasons for chargebacks?
- FraudFraud is the most common reason that chargebacks occur. In 2017, credit card fraud was the most common form of identity theft, with 133,015 reports. This type of fraud occurs when a consumer gets charged for something from your business, but never actually purchased anything from you.Friendly fraud is also a common issue. This is when a client deliberately intends to get goods without paying. A dishonest client, in this case, will contact the bank and claim that there are suspicious transactions, yet he or she is the one who purchased the goods. It’s estimated that friendly fraud will cost merchants as much as $25 billion by 2020.
Either way, in a bid to protect their clients, financial institutions are very strict in the event of fraud claims, and in most cases, it is the merchant that loses.
- Customer dissatisfactionSometimes when a customer isn’t satisfied with their purchase, they will request a chargeback instead of bringing up the issue with the merchant first. One way to prevent this from happening is to make your return policies clear, and provide a way for customers to easily contact your business if they are not satisfied.
- Shipping hitchesA customer can initiate a chargeback on the grounds of not having received the ordered goods. This is a common issue, especially with retailers who do not have a streamlined delivery system. If shipping issues are causing your e-commerce business to experience chargebacks, you may want to consider outsourcing fulfilment to a 3PL services provider.
How to prevent chargebacks
Chargebacks can be a stressful experience for merchants, but there are measures you can take to prevent them. Here are some things that merchants can do to reduce the amount of chargebacks their business receives.
Use a recognizable name as your credit card descriptor. If a customer doesn’t recognize your business name on their credit card statement, they may file a claim. Using a recognizable name as your credit card descriptor will help to prevent this from happening.
Make it easy for customers to find information on your website, and to contact your business. This means having clear product descriptions and images, as well as your return policy and customer service contact information in places that are easy to find. That way, when customers are confused or upset about a charge, they can contact your business to investigate. By being available to talk and resolve issues, chargebacks can be prevented.
If a customer is unhappy, offer them a refund. Offering a refund helps merchants avoid going through the chargeback process, which will most likely result in returning the money to the customer anyway.
Keep records. Most bank investigations tend to favor clients, especially if the involved merchant has no records to add weight to their defense.
Reply on time. Some clients are a bit impatient with merchants who take ages to reply, and this prompts them to file chargebacks. Sellers can avoid this occurring by having effective communication systems.
Cut back on late shipping. A client can file for a chargeback after the goods take longer than the designated time. You can avoid this scenario by ensuring that you communicate the right shipping dates to customers.